Income Distribution in Urban China during the Period of Economic Reform and Globalization Azizur Rahman Khan; Keith Griffin; Carl Riskin The American Economic Review, Vol. 89, No. 2, Papers and Proceedings of the One Hundred Eleventh Annual Meeting of the American Economic Association (May, 1999), 296-300 Stable URL: http: //links. jstor.org/sici?sici=0002-8282%28199905%.2989%3A2%3C296%3AIDIUCD%3E2.0.CO%3B2-D The American Economic Review is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms. html. jstor's terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http: //www.jstor.org/journals/aea. html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support @jstor.org. http://www.stor.org/ Fri May2114:37:332004
Income Distribution in Urban China During the Period of economic Reform and globalization By AZIZUR RAHMAN KHAN, KEITH GRIFFIN, AND CARL RISKIN* This paper addresses three issues that are ber of urban households was reduced to 6,931 central to understanding the effects of the (or 21, 694 persons) transition in China from central planning to It is now possible, for the first time,to a more market-oriented economic system. measure changes in the degree of income in First, what have been the consequences of equality in urban areas using internationally the economic reforms for the distribution comparable concepts of income. It is also of income in urban areas? Second, what has possible to use the two surveys to determine happened to the incidence of urban poverty? which components of total income have con Third, have government policies helped to tributed most to the change in inequality diminish or accentuate urban poverty and in- The basic data are presented in Table 1 equality? Answers to these questions are Between 1988 and 1995 the Gini coeffi based on a comparison of two national sam- cient for the distribution of household in ple surveys conducted in 1988 and 1995 come per capita increased from 0.233 to 0.332, or by 42.5 percent(row 1). Although I. Changes in Urban Inequalit the degree of inequality still is low in com parison with other developing countries, the The distribution of income in urban China sharp increase in inequality in only seven in 1988, ten years after the economic reforms years is remarkable. Equally remarkable is began, was remarkably egalitarian. True, ur- the change in the composition of income that ban inequality had increased, but the Gini co- occurred during that period, notably, the rise efficient continued to be lower than in any in cash income from employment from 44.4 other country for which data are available. percent to 61.3 percent of total income(row These results were based on a survey of urban 2), the rise in the relative importance of and rural incomes organized by an interna- pensions (row 3 )and of the rental value of tional group of economists working with col- owned housing (row 6)combined with the leagues in the Economics Institute of the fall in the importance of housing subsidies Chinese Academy of Social Sciences. The ur- (row 7), and the virtual disappearance of ban portion of the 1988 survey contained other subsidies net of direct taxes and fees 9,009 households (31, 827 persons drawn (row 8). In 1988, urban households were de- tive of urban conditions throughout China. and the government for 39 percent of their The 1988 survey was replicated in 1995. The income; by 1995, subsidies accounted for number of provinces covered was increased by only 11 percent of household income one with the addition of Sichuan, but the num- We also report the concentration ratios for ach of the nine components of income in ble 1. These concentration ratios are calculated in the same way as Gini coefficients except iked in order of versity of Califor iverside, CA 92521-0427: Riskin lumbia University, New York, NY ovinces were Beijing municipality, Shanxi, Inequality in China: Composition, Distribution and Liaoning, Jiangsu, Anhui, Henan, Hubei, Guangdong, Growth of Household Income, 1988 to 1995, China Quar- terly, June 199
YOL 89 NO. 2 INCOME DISTRIBUTION IN CHINA TABLE 1-URBAN INCOME INEQUALITY IN CHINA and individual enterprises, and private trans AND ITS SOURCES, 1988 AND 1995 fers were more equally distributed in 1995 than in 1988. All other components of total income were less evenly distributed, particu Share of total Gini or larly the rental value of owned housing and oncentration housing subsidies 19881995 The two columns of table 1b contain in- formation on the contribution of each source Cash income from employment 44. 42 61.30 0.178 0.247 of income to overall inequality in the distri- 0.740.530.4130.04 ticular source depends both on the share of that individual enterprises 0.491.2704370484 source in total income and its concentration ntal value of owned housing 13. 4 9.74 0.26 housing subsidy) account for 93.7 percent of .390.3380.639 ratio. Four sources of income(wages, pen- 516 sions, the rental value of owned housing, and Private transfers, etc overall inequality. In the case of wages and the rental value of owned housing, both the con centration ratio and the share in total income overall inequality rose In the case of housing subsidies, the cor centration ratio rose dramatically(from 0 Measure 995 to 0.516), but their share of total income fell to974 ome from employment 9. 8 2 0 cent of total income ). The opposite occurred in the case of pensions. The share of pensions 0.1 in total income rose but the concentration ra- tio fell slightl 15.l Despite changes in the composition of in Private transfers, etc. 74 3.2 come, increased inequality in urban China was due entirely to greater inequality in the distri Source: Khan and Riskin (1998) bution within individual components of ome. The change in the sources of income played no role in explaining the increase in urban inequality. Had the com- ita income rather than in order of income re- position of income in 1995 remained the same ceived from each source of income. The Gini as in 1988 and only the distribution within in coefficient is simply a weighted average of the dividual components changed it did. the concentration ratios, where the weights are the Gini ratio of urban income distribution in 1995 shares of each source of income in total in- would have been exactly the same as its actual come. The concentration ratio of a particular value source of income thus measures how equally that source of income is distributed over I. Urban Poverty household per capita income from all sources In 1988, only the distributions of wage in- The real income of urban households in ome and net subsidies other than housing creased 4.48 percent each year between 1988 were becoming more equal; all other compo- and 1995. This is far lower than the rate of nents of total income were growing more dis- growth in per capita GDP ( which was growing parate. In 1995 wage income, net subsidies at 8. 1 percent per year for China as a whole) other than housing, pensions, and income from private and individual enterprises were be coming more equally distributed; the opposite derreporting of this source of income. was true for the other four sources of income. we put little ce in the estimates of its levels and However, only pensio from private distril
AEA PAPERS AND PROCEEDINGS MAY 1999 TABLE 2--URBAN POVERTY IN CHINA, 1988 AND 1995 dence of poverty fell only 2. 4 percent between 1988 and 1995, or from 8.2 percent to 8.0 per BASED OFFICIAL CPI) cent of the urban population. Moreover the ur Proportionate ban population itself grew rapidly. As a result, count poverty gap poverty the total number of urban poor rose by 19.6 Poverty 198819951988199519881995 percent during the period, or from 23.5 million in 1988 to 28.1 million people in 1995 The estimates of urban poverty in Table 2 2.7 4.1 0.4 0.9 0.104 are surprising, but the numerical indicators may actually be too comforting. There are rea- Notes: The poverty line is based on the cost of 2, 100 kilo- sons to believe that the consumer price index, alories per person per day with an adjustment for nonfood which we used to estimate the growth in real purchases, broadly consistent with the preference of lo income, understates the increase in the cost of 291 yuan per person The extreme poverty threshold is living of the poor because its weights are based on the expenditure of an average consumer rather than a poor consumer. Average consum- ers spend a smaller proportion of the eir incon on food grains than do the poor, and the price of food grains rose much more rapidly than and almost certainly lower than the rate of average prices. If the price index used to cal- owth of per capita urban GDP. This indi- culate changes in real incomes of the poor cates that the household share in GDP fell and were adjusted to take this bias into accout e that the combined share of government and the head-count index would show a signific increase in poverty between 1988 and 1995 Be that as it may, the growth in household The conclusion thus is inescapable: economic income was very high. Had there been no in- reform in China has not succeeded in reducing crease in inequality, such a rapid increase in urban poverty, and by most measures urban pov average incomes would have sufficed virtually erty has increased, Moreover, our sample does eradicate urban poverty. The rise in inequal- not include thefloating population"in urban however, offset the rise in per capita in- areas (i.e, people who have migrated to the cit come, and as a result the estimated effect on ies but have not been given the status of legal the incidence of poverty ranges from an insig- urban resident or the entitlements enjoyed by le nificant improvement to a significant deterio- gal residents ) Yet the available evidence sug- ation, depending on the poverty indicator gests that these migrants are poorer than the used and the cost-of-living index chosen to ad- official urban population. The estimates of urban just the poverty income threshold poverty, and perhaps inequality as well, would The data in Table 2 indicate that, while the have been higher if the floating population had head-count measure of urban poverty declined been included. While this does not detract from slightly between 1988 and 1995, the propor- Chinas achievement of a moderate reduction in tionate poverty gap and the weighted povert rural poverty(not reported here), it does chal gap measures both increased. That is, the lenge the claim that"a rising tide lifts all boats. gregate income gap of the urban poor in creased, as did inequality in the distribution of Ill. "Disequalizing"'Policies income among the urban poor. If one defines extreme poverty as incor ivalent to 80 In 1988, the structure of wages was highly percent or less of the poverty income thresh- compressed( the concentration ratio for wage in old, the two surveys indicate there was a rise come was only 0. 178), and this had a number in extreme poverty as measured by all three of adverse incentive effects: it reduced the in- indicators centive to work hard within the firm, it provided While the head-count measure of urban only weak signals to improve the allocation of poverty reported in Table 2 is very low labor among firms, and it reduced the incentive pared to other developing countries, the inci- of workers to acquire skills and invest in their
VOL 89 NO. 2 ISTRIBUTION IN CHINA education. There was thus a strong case, as part in such a way that it actually contributed of the process of reform and integration into the greater inequality. The concentration ratio for lobal economy, to increase wage differentials. housing subsidies increased by 65.9 percent And this in fact is what happened, so that by(from 0. 311 to 0.516), and the concentration 1995 the concentration ratio for wage income ratio for the rental value of owned housing in- had increased to 0. 247. In that year, inequality creased by 89. 1 percent( from 0.338 to 0.639) in the distribution of wages accounted for 45.6 In 1995, nearly 41 percent of the remaining percent of overall inequalit housing subsidies were received by the richest Unfortunately, the tax/subsidy system and 10 percent of the urban population, and just other urban policies were not adjusted to com- over 60 percent of the rental value of owned pensate for increased wage inequality. Instead housing accrued to the top 10 percent of the by creating a highly disequalizing"system subsidies combined)accounted for 37 percent of net subsidies, promoting a housing reform of overall inequality in the distribution of in- that resulted in an extremely uneven distribu- come in urban areas in 1995 tion of housing assets and housing services, One of the reasons why poverty persisted and by failing to construct an adequate safety in spite of rapid overall growth, is that the net before state-enterprise reform began gen- GDP elasticity of personal income was low erating large numbers of layoffs of state-sector that is, the growth in personal income(the orkers at partial or no pay. variable in terms of which poverty thresholds Despite their possible adverse effects on ef- are measured) was much slower than the ficiency, ration coupons in 1988 were the most growth in GDP. This was due to macroeco equitably distributed of all urban subsidies, nomic policies that affected the distribution of and these had an equalizing effect on urban incremental GDP among households, govern- income distribution. By 1995 the ration- ment, and"" sectors and between coupon system had been abolished, and house consumption and accumulation. The dramatic holds were required to obtain their food fall in net subsidies and transfers from the gov- upplies and other essentials on the free mar- ernment and collectives and the relentless ket. Housing subsidy in kind was the principal drive for ever higher rates of accumulation remaining element in a system of urban sub- resulting in an increase in the domestic saving sidies, and as discussed below, its distribution rate from an already high 37. 5 percent of GDP was far more unequal in 1995 than in 1988. in 1988 to a staggering 42 percent in 1995, are The contribution of"net nonhousing subsi- some of the manifestations of this process dies'' to total urban incomes fell from 20.94 Rapid of employment, arising percent to 1.25 percent between 1988 and from labor-intensive industrialization pro 1995, and the residual subsidies were distrib- moted by freer trade and greater integration uted less equally into the global economy, might have offset Reform of the housing system had similarly at least in part greater inequality in the dis- unfortunate consequences. In 1988, only 13. 8 tribution of wage earnings. If this had oc percent of the urban population lived in private curred, the urban population would have housing; by 1995 the proportion living in their been protected from rising poverty even if own homes had risen to 41.7 percent. The rel- not from increased inequality. Unfortunately tive importance of housing subsidies in kind industrialization during the period of glob fell by nearly half, while the importance of the alization has so far been remarkably hostile rental value of owned housing rose nearly to job creation. Indeed, the output elasticity threefold( compare rows 6 and 7 in Table 1A). of employment has been extraordinarily lo Widespread privatization of the housing stock for urban industries as a whole, namely was in principle commendable, but it was done 0.037. This has happened despite a very high output elasticity of employment in industries under private and other new forms of own- s The number of layoffs has continued to mount, reach- ership. The problems have arisen from the significantly negative output elasticity of
AEA PAPERS AND PROCEEDINGS MAY 999 employment in the collective enterprises and cidence of poverty. This process may well the insignificant elasticity in the state enter- continue until the transition is completed prises(see Khan, 1998) sometime in the future The reason why the collec ve and state In summary, the increase in urban inequal enterprises performed so poorly in terms of ity between 1988 and 1995 was due to job creation is that, with the increase in mar- greater inequality in the distribution of most ket orientation at home and greater integra- of the major components of income, rather tion into the world economy, they were than to a change in the composition of in- subjected to increased competition from come. Urban poverty failed to decline be domestic and foreign private enterprises. cause the rise in personal income lagged Chinas state and collective enterprises re- far behind the rise in GDP, and the rise in sponded to increased competition by reduc- average income that took place was offset by ing the disguised unemployment they had an extraordinary increase in inequality in the nherited from the past as a consequence of distribution of income. The extreme employ- the policy of guaranteed employment for all. ment hostility of industrial growth made The observed low output elasticity of em- these difficulties even worse. Gov ployment in the period of reform and inte- policies related to the social safety net, ration economy conce eals coupons, subsidies, and housing aggravated two divergent tendencies: (i)a high output inequality and perpetuated poverty. Some elasticity of employment at constant inten- increase in urban inequality probably was sity of work per worker; and (ii)a rise in inevitable and even desirable in the context the intensity of work per worker due to a of market-oriented economic reforms, but eduction of disguised unemployment, Once regressive social policies made the burdens the transition is completed and the concealed of transition greater than they need have unemployment in state and collective enter- been prises is eliminated, China' s industries will be much more efficient. and thereafter the REFERENCES observed output elasticity of employment may rise. But meanwhile the process of tran- Khan, A.R. " Poverty in China in the Period of sition has been characterized by very slow Globalization: New Evidence on Trend and growth of employment, and this has pre Pattern. Issues in Development Discussion vented the benefits of growth from being aper No. 22, International Labour Office widely spread among the urban population Geneva Switzerland, 1998 The consequence has been a rise in the in- Khan, Azizur Rahman; Griffin, Keith; Riskin, Carl and Zhao, Renwei. Household Income and Its Distribution in China. ' China quar terly, December 1992, (132), pp. 1029-61 6 Some of the Khan, Azizur and Riskin, Carl. " 'Income and In- equality in China: Composition, Distribu- orkers. whose e nsen as a res tion and growth of household income grant workers are not considered part of 1988 to 1995. China Quarterly, June 1998,(154),pp.221-53
